Tag Archives: internet competition

Functional splintering [of the internet] is already happening. When tech companies build “walled gardens”, they decide the rules for what happens inside the walls, and users outside the network are excluded…

Governments are playing catch-up but they will eventually reclaim the regulatory power that has slipped from their grasp. Dictatorships such as China retained control from the start; others, including Russia, are following Beijing. With democracies, too, asserting their jurisdiction over the digital economy, a fragmentation of the internet along national lines is more likely. …The prospect of a “splinternet” has not been lost on governments. To avoid it, Japan’s G20 presidency has pushed for a shared approach to internet governance. In January 2019, prime minister Shinzo Abe called for “data free flow with trust”. The 2019 Osaka summit pledged international co-operation to “encourage the interoperability of different frameworks”.

But Europe is most in the crosshairs of those who warn against fragmentation…US tech giants have not appreciated EU authorities challenging their business model through privacy laws or competition rulings. But more objective commentators, too, fear the EU may cut itself off from the global digital economy. The critics fail to recognise that fragmentation can be the best outcome if values and tastes fundamentally differ…

If Europeans collectively do not want micro-targeted advertising, or artificial intelligence-powered behaviour manipulation, or excessive data collection, then the absence on a European internet of services using such techniques is a gain, not a loss. The price could be to miss out on some services available elsewhere… More probably, non-EU providers will eventually find a way to charge EU users in lieu of monetising their data…Some fear EU rules make it hard to collect the big data sets needed for AI training. But the same point applies. EU consumers may not want AI trained to do intrusive things. In any case, Europe is a big enough market to generate stripped, non-personal data needed for dumber but more tolerable AI, though this may require more harmonised within-EU digital governance. Indeed, even if stricter EU rules splinter the global internet, they also create incentives for more investment into EU-tailored digital products. In the absence of global regulatory agreements, that is a good second best for Europe to aim for.

Excerpts from Martin Sandbu, Europe Should Not be Afraid of Splinternet, FT, July 2, 2019

A new front has opened in the battle between the U.S. and China over control of global networks that deliver the internet. This one is beneath the ocean. While the U.S. wages a high-profile campaign to exclude China’s Huawei Technologies Co. from next-generation mobile networks over fears of espionage, the company is embedding itself into undersea cable networks that ferry nearly all of the world’s internet data.

About 380 active submarine cables—bundles of fiber-optic lines that travel oceans on the seabed—carry about 95% of intercontinental voice and data traffic, making them critical for the economies and national security of most countries.

The Huawei Marine’s Undersea Cable Network majority owned by Huawei Technologies, has worked on some 90 projects to build or upgrade submarine cables around the world…US o fficials say the company’s knowledge of and access to undersea cables could allow China to attach devices that divert or monitor data traffic—or, in a conflict, to sever links to entire nations. Such interference could be done remotely, via Huawei network management software and other equipment at coastal landing stations, where submarine cables join land-based networks, these officials say.

Huawei Marine said in an email that no customer, industry player or government has directly raised security concerns about its products and operations.Joe Kelly, a Huawei spokesman, said the company is privately owned and has never been asked by any government to do anything that would jeopardize its customers or business. “If asked to do so,” he said, “we would refuse.”

The U.S. has sought to block Huawei from its own telecom infrastructure, including undersea cables, since at least 2012. American concerns about subsea links have since deepened—and spread to allies—as China moves to erode U.S. dominance of the world’s internet infrastructure…..Undersea cables are owned mainly by telecom operators and, in recent years, by such content providers as Facebook and Google. Smaller players rent bandwidth.Most users can’t control which cable systems carry their data between continents. A handful of switches typically route traffic along the path considered best, based on available capacity and agreements between cable operators.

In June 2017, Nick Warner, then head of Australia’s Secret Intelligence Service, traveled to the Solomon Islands, a strategically located South Pacific archipelago. His mission, according to people familiar with the visit, was to block a 2016 deal with Huawei Marine to build a 2,500-mile cable connecting Sydney to the Solomons. Mr. Warner told the Solomons’ prime minister the deal would give China a connection to Australia’s internet grid through a Sydney landing point, creating a cyber risk, these people said. Australia later announced it would finance the cable link and steered the contract to an Australian company. In another recent clash, the U.S., Australia and Japan tried unsuccessfully in September 2018 to quash an undersea-cable deal between Huawei Marine and Papua New Guinea.

U.S. and allied officials point to China’s record of cyber intrusions, growing Communist Party influence inside Chinese firms and a recent Chinese law requiring companies to assist intelligence operations. Landing stations are more exposed in poorer countries where cyber defenses tend to be weakest, U.S. and allied officials said. And network management systems are generally operated using computer servers at risk of cyber intrusion. Undersea cables are vulnerable, officials said, because large segments lie in international waters, where physical tampering can go undetected. At least one U.S. submarine can hack into seabed cables, defense experts said. In 2013, former National Security Agency contractor Edward Snowden alleged that Britain and the U.S. monitored submarine cable data. The U.S. and its allies now fear such tactics could be used against them. American and British military commanders warned recently that Russian submarines were operating near undersea cables. In 2018, the U.S. sanctioned a Russian company for supplying Russian spies with diving equipment to help tap seabed cables.

The Ionian Sea Submarine Cable Project (Greece)

China seeks to build a Digital Silk Road, including undersea cables, terrestrial and satellite links, as part of its Belt and Road plan to finance a new global infrastructure network. Chinese government strategy papers on the Digital Silk Road cite the importance of undersea cables, as well as Huawei’s role in them. A research institute attached to China’s Ministry of Industry and Information Technology, in a paper published in September, praised Huawei’s technical prowess in undersea cable transmission and said China was poised to become “one of the world’s most important international submarine cable communication centers within a decade or two.” China’s foreign and technology ministries didn’t respond to requests for comment…

Huawei Marine Networks

Bjarni Thorvardarson, then chief executive of the cable’s Ireland-based operator, said U.S. authorities raised no objections until 2012, when a congressional report declared Huawei Technologies a national security threat. Mr. Thorvardarson wasn’t convinced. “It was camouflaged as a security risk, but it was mostly about a preference for using U.S. technology,” he said. Under pressure, Mr. Thorvardarson dropped Huawei Marine from Project Express in 2013. The older cable network continued to use Huawei equipment.

The company is now the fourth-biggest player in an industry long dominated by U.S.-based SubCom and Finnish-owned Alcatel Submarine Networks. Japan’s NEC Corp is in third place.Huawei Marine is expected to complete 28 cables between 2015 and 2020—nearly a quarter of all those built globally—and it has upgraded many more, according to TeleGeography, a research company.

Excerpts from America’s Undersea Battle With China for Control of the Global Internet Grid , WSJ, Mar. 12, 2019

The European Union’s (EU) approach to regulating the big tech companies draws on its members’ cultures tend to protect individual privacy. The other uses the eu’s legal powers to boost competition. The first leads to the assertion that you have sovereignty over data about you: you should have the right to access them, amend them and determine who can use them. This is the essence of the General Data Protection Regulation (GDPR), whose principles are already being copied by many countries across the world. The next step is to allow interoperability between services, so that users can easily switch between providers, shifting to firms that offer better financial terms or treat customers more ethically. (Imagine if you could move all your friends and posts to Acebook, a firm with higher privacy standards than Facebook and which gave you a cut of its advertising revenues.)

Europe’s second principle is that firms cannot lock out competition. That means equal treatment for rivals who use their platforms. The EU has blocked Google from competing unfairly with shopping sites that appear in its search results or with rival browsers that use its Android operating system. A German proposal says that a dominant firm must share bulk, anonymised data with competitors, so that the economy can function properly instead of being ruled by a few data-hoarding giants. (For example, all transport firms should have access to Uber’s information about traffic patterns.) Germany has changed its laws to stop tech giants buying up scores of startups that might one day pose a threat.

Ms Vestager has explained, popular services like Facebook use their customers as part of the “production machinery”. …The logical step beyond limiting the accrual of data is demanding their disbursement. If tech companies are dominant by virtue of their data troves, competition authorities working with privacy regulators may feel justified in demanding they share those data, either with the people who generate them or with other companies in the market. That could whittle away a big chunk of what makes big tech so valuable, both because Europe is a large market, and because regulators elsewhere may see Europe’s actions as a model to copy. It could also open up new paths to innovation.

In recent decades, American antitrust policy has been dominated by free-marketeers of the so-called Chicago School, deeply sceptical of the government’s role in any but the most egregious cases. Dominant firms are frequently left unmolested in the belief they will soon lose their perch anyway…By contrast, “Europe is philosophically more sceptical of firms that have market power.” ..

Tech lobbyists in Brussels worry that Ms Vestager agrees with those who believe that their data empires make Google and its like natural monopolies, in that no one else can replicate Google’s knowledge of what users have searched for, or Amazon’s of what they have bought. She sent shivers through the business in January when she compared such companies to water and electricity utilities, which because of their irreproducible networks of pipes and power lines are stringently regulated….

The idea is for consumers to be able to move data about their Google searches, Amazon purchasing history or Uber rides to a rival service. So, for example, social-media users could post messages to Facebook from other platforms with approaches to privacy that they prefer…

Warren Buffett, the 21st century’s best-known investor, extols firms that have a “moat” around them—a barrier that offers stability and pricing power.One way American firms have improved their moats in recent times is through creeping consolidation. The Economist has divided the economy into 900-odd sectors covered by America’s five-yearly economic census. Two-thirds of them became more concentrated between 1997 and 2012 (see charts 2 and 3). The weighted average share of the top four firms in each sector has risen from 26% to 32%…

These data make it possible to distinguish between sectors of the economy that are fragmented, concentrated or oligopolistic, and to look at how revenues have fared in each case. Revenues in fragmented industries—those in which the biggest four firms together control less than a third of the market—dropped from 72% of the total in 1997 to 58% in 2012. Concentrated industries, in which the top four firms control between a third and two-thirds of the market, have seen their share of revenues rise from 24% to 33%. And just under a tenth of the activity takes place in industries in which the top four firms control two-thirds or more of sales. This oligopolistic corner of the economy includes niche concerns—dog food, batteries and coffins—but also telecoms, pharmacies and credit cards.

The ability of big firms to influence and navigate an ever-expanding rule book may explain why the rate of small-company creation in America is close to its lowest mark since the 1970s … Small firms normally lack both the working capital needed to deal with red tape and long court cases, and the lobbying power that would bend rules to their purposes….

Another factor that may have made profits stickier is the growing clout of giant institutional shareholders such as BlackRock, State Street and Capital Group. Together they own 10-20% of most American companies, including ones that compete with each other. Claims that they rig things seem far-fetched, particularly since many of these funds are index trackers; their decisions as to what to buy and sell are made for them. But they may well set the tone, for example by demanding that chief executives remain disciplined about pricing and restraining investment in new capacity. The overall effect could mute competition.

The cable television industry has become more tightly controlled, and many Americans rely on a monopoly provider;prices have risen at twice the rate of inflation over the past five years. Consolidation in one of Mr Buffett’s favourite industries, railroads, has seen freight prices rise by 40% in real terms and returns on capital almost double since 2004. The proposed merger of Dow Chemical and DuPont, announced last December, illustrates the trend to concentration. //

Roughly another quarter of abnormal profits comes from the health-care industry, where a cohort of pharmaceutical and medical-equipment firms make aggregate returns on capital of 20-50%. The industry is riddled with special interests and is governed by patent rules that allow firms temporary monopolies on innovative new drugs and inventions. Much of health-care purchasing in America is ultimately controlled by insurance firms. Four of the largest, Anthem, Cigna, Aetna and Humana, are planning to merge into two larger firms.

The rest of the abnormal profits are to be found in the technology sector, where firms such as Google and Facebook enjoy market shares of 40% or more

But many of these arguments can be spun the other way. Alphabet, Facebook and Amazon are not being valued by investors as if they are high risk, but as if their market shares are sustainable and their network effects and accumulation of data will eventually allow them to reap monopoly-style profits. (Alphabet is now among the biggest lobbyists of any firm, spending $17m last year.)…

Perhaps antitrust regulators will act, forcing profits down. The relevant responsibilities are mostly divided between the Department of Justice (DoJ) and the Federal Trade Commission (FTC), although some …[But]Lots of important subjects are beyond their purview. They cannot consider whether the length and security of patents is excessive in an age when intellectual property is so important. They may not dwell deeply on whether the business model of large technology platforms such as Google has a long-term dependence on the monopoly rents that could come from its vast and irreproducible stash of data.They can only touch upon whether outlandishly large institutional shareholders with positions in almost all firms can implicitly guide them not to compete head on; or on why small firms seem to be struggling. Their purpose is to police illegal conduct, not reimagine the world. They lack scope.

Nowhere has the alternative approach been articulated. It would aim to unleash a burst of competition to shake up the comfortable incumbents of America Inc. It would involve a serious effort to remove the red tape and occupational-licensing schemes that strangle small businesses and deter new entrants. It would examine a loosening of the rules that give too much protection to some intellectual-property rights. It would involve more active, albeit cruder, antitrust actions. It would start a more serious conversation about whether it makes sense to have most of the country’s data in the hands of a few very large firms. It would revisit the entire issue of corporate lobbying, which has become a key mechanism by which incumbent firms protect themselves.

Excerpts from Too Much of a Good Thing, Economist, Mar. 26, 2016, at 23

Seeking to cut dependence on companies such as Google, Microsoft, and LinkedIn, Putin in recent years has urged the creation of domestic versions of everything from operating systems and e-mail to microchips and payment processing. Putin’s government says Russia needs protection from U.S. sanctions, bugs, and any backdoors built into hardware or software. “It’s a matter of national security,” says Andrey Chernogorov, executive secretary of the State Duma’s commission on strategic information systems. “Not replacing foreign IT would be equivalent to dismissing the army.”

Since last year, Russia has required foreign internet companies to store Russian clients’ data on servers in the country. In January 2016 the Kremlin ordered government agencies to use programs for office applications, database management, and cloud storage from an approved list of Russian suppliers or explain why they can’t—a blow to Microsoft, IBM, and Oracle. Google last year was ordered to allow Android phone makers to offer a Russian search engine. All four U.S. companies declined to comment.

And a state-backed group called the Institute of Internet Development is holding a public contest for a messenger service to compete with text and voice apps like WhatsApp and Viber. Russia’s Security Council has criticized the use of those services by state employees over concerns that U.S. spies could monitor the encrypted communications while Russian agencies can’t,,

On Nov. 10, 2016, Russia’s communications watchdog said LinkedIn would be blocked for not following the data-storage rules….. That same day, the Communications Ministry published draft legislation that would create a state-controlled body to monitor .ru domains and associated IP addresses. The proposal would also mandate that Russian internet infrastructure be owned by local companies and that cross-border communication lines be operated only by carriers subject to Russian regulation…

The biggest effect of the Kremlin’s internet campaign can be seen in the Moscow city administration, which is testing Russian-made e-mail and calendar software MyOffice Mail on 6,000 machines at City Hall. The city aims to replace Microsoft Outlook with the homegrown alternative, from Moscow-based New Cloud Technologies, on as many as 600,000 computers in schools, hospitals, and local agencies….“Money from Russian taxpayers and state-controlled companies should be spent primarily on domestic software,” Communications Minister Nikolay Nikiforov told reporters in September. “It’s a matter of jobs, of information security, and of our strategic leadership in IT.”

And then there’s Free Basics, the two-year-old project Chief Executive Officer Mark Zuckerberg has called an online 911. In about three dozen developing countries so far, Free Basics—also known as Internet.org—includes a stripped-down version of Facebook and a handful of sites that provide news, weather, nearby health-care options, and other info. One or two carriers in a given country offer the package for free at slow speeds, betting that it will help attract new customers who’ll later upgrade to pricier data plans…

Facebook says Free Basics is meant to make the world more open and connected, not to boost the company’s growth….On Dec. 21, 2016, the Indian government suspended the program, offered in the country by carrier Reliance Communications….“Who could possibly be against this?”

Opponents, including some journalists and businesspeople, say Free Basics is dangerous because it fundamentally changes the online economy. If companies are allowed to buy preferential treatment from carriers, the Internet is no longer a level playing field, says Vijay Shekhar Sharma, founder of Indian mobile-payment company Paytm....“We don’t see Free Basics as philanthropy. We see it as a land grab,” says Pahwa.

The Swiss government has ordered tighter security for its own computer and telephone systems that could block foreign companies from key technology and communications contracts. The governing Federal Council’s decision Wednesday cited concerns about foreign spies targeting Switzerland.

National Security Agency leaker Edward Snowden, who worked for the CIA at the U.S. mission to the U.N. in Geneva from 2007 to 2009, has released documents indicating that large American and British IT companies cooperated with those countries’ intelligence services.According to a Swiss government statement, contracts for critical IT infrastructure will “where possible, only be given to companies that act exclusively according to Swiss law, where a majority of the ownership is in Switzerland and which provides all of its services from within Switzerland’s borders.”